The Insiders' Dilemma: An Experiment on Merger Formation

34 Pages Posted: 24 Aug 2005

See all articles by Tobias Lindqvist

Tobias Lindqvist

Research Institute of Industrial Economics (IUI)

Johan Stennek

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Date Written: April 2005

Abstract

This paper tests the insiders' dilemma hypothesis in a laboratory experiment. The insiders' dilemma means that a profitable merger does not occur, because it is even more profitable for each firm to unilaterally stand as an outsider (Stigler, 1950; Kamien and Zang, 1990 and 1993). The experimental data provides support for the insiders' dilemma, and thereby for endogenous rather than exogenous merger theory. More surprisingly, our data suggests that fairness (or relative performance) considerations also make profitable mergers difficult. Mergers that should occur in equilibrium do not, since they require an unequal split of surplus.

Keywords: Insiders' dilemma, coalition formation, experiment, antitrust, mergers

JEL Classification: C78, C92, G34, L13, L41

Suggested Citation

Lindqvist, Tobias and Stennek, Johan, The Insiders' Dilemma: An Experiment on Merger Formation (April 2005). CEPR Discussion Paper No. 5016. Available at SSRN: https://ssrn.com/abstract=772766

Tobias Lindqvist

Research Institute of Industrial Economics (IUI) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden

HOME PAGE: http://www.iui.se/staff/tobiasl/index.htm

Johan Stennek (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden
+46 8 665 4536 (Phone)
+46 8 665 4599 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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